Should I stay invested? Roxboro house view December 2023


Investors across the world have been contacting their advisers to discuss how their investments are faring. Interest rates have risen and it is not an unfair question to ask ‘Why should I stay invested when I can get 5% from the bank?’ We thought we might share our current views.


Conditions have been very challenging for a long period but we believe it is in the long term interest of many people to stay invested. We cannot determine the time when markets will turn for the better but we are here to help our clients avoid making decisions which may have long-term bad consequences on the basis of temporary factors.


The sequence of events we have seen recently has been unparalleled. 2018 was a poor year for the stock market but markets barely had time to stabilise before we faced the pandemic and lockdown of much of the global economy. Governments reacted with massive printing of money which has led inevitably to inflation. The events in Ukraine and weaponisation of oil and food supplies has only served to ramp up the inflationary pressures. Whilst many people have experienced poor returns we are frankly surprised that markets have not suffered greater declines. 


Shares have not been alone in facing difficulty and virtually all asset classes have faced huge challenges over recent years. Many other asset classes have actually performed much worse. At the extreme end, crypto investors lost 60% to 70% of their portfolio value in a matter of months during 2022. Supposedly lower risk assets such as government bonds and other fixed interest securities have actually lost more money than shares over recent years as inflation has kicked in. Even UK residential property has decreased in value recently and faces a bumpy ride as mortgage rates remain high. Let’s remember cash may not offer a safe haven when inflation rates are high.


So, is it worthwhile staying invested rather than jumping ship into cash? History can give us some insight as the way money works and economic truths have not changed.


If we look back to previous periods of high inflation cash investors have almost without exception done badly compared to those who hold real assets such as shares and property. There are various reasons for this but a simple factor is that if companies or property owners face increasing costs (inflation) they can pass on the costs to their customers or tenants by raising their prices or rent. Hence, they can protect their profitability during inflationary times and asset prices will often increase. Cash investors do not enjoy this type of protection.


The laws of capitalism have not changed, as recently explained by our friends at 7IM


·       Governments have to pay higher returns than cash to borrow. Governments NEED to raise money through debt. It’s what keeps pensions paid and the lights on. If cash rates are at 5%, government bonds have to offer people MORE than that to tempt them out of the bank – even more so if they want them to lock it up for 10 years. 

·       Companies have to pay more than governments to borrow. Companies NEED to incentivise you to lend to them, rather than to the government … which means paying you more than the government does! If cash is at 5%, and government bonds are at 6% (say)… corporate debt has to be higher (otherwise why take the risk?!).

·       Equities have to offer the chance of being paid more than corporate bonds. Companies ALSO need to generate money for their shareholders (who are taking even more risk than their bondholders). Because if their shareholders could do better leaving their money in the bank … soon there’d be no shareholders. And the decision maker at a company knows that. Any new project requiring a cash investment will be judged against the bank rate. If a new project doesn’t have the potential to beat what the bank’s offering, why do it?


The bottom line is that cash sets the bar. Everything else then needs to jump over it.


Of course, it’s tempting to believe that today’s investment circumstances are unique. “This time it’s different!”.

Inflation is high. Government debt levels have soared. Geopolitical hotspots are flaring up in Ukraine, the Middle East and Taiwan. Add to that the transformational developments in AI and the increasingly savage impact of climate change. 


But is it really different this time?


Between 1993 and 2007, interest rates averaged 5.35%. Government debt levels were rising sharply. Geopolitical hotspots were flaring up in Yugoslavia, the Middle East and Russia. The internet was revolutionising society.


In the face of all that, surely just staying in cash, at 5.25%, was best?


Absolutely not.


That higher cash bar created better jumpers. The FTSE 100 (with dividends reinvested) returned 8.1% annualised over that period. The world continued to jump over the bar… 


Many of the economic indicators are relatively healthy in terms of the prospects of a global recession.


Whilst there is little anyone can do in terms of global economic conditions it is important that your portfolio is carefully monitored to ensure that your managers are performing well compared to peers. 


If you have at least £100,000 in investable assets and would like to discuss your position please do not hesitate to contact us.